By David Brooks, Technical Director, Broadstone
We appear to be experiencing a combination of issues that have created the perfect space for scammers to stalk members’ pensions and the Government needs to do something decisive to address it.
What sort of scams are prevalent?
While trust-busting is nothing new, we have seen some of the following types of scams:
1. Pensions for loans.
2. Storage-pods (and other investment scams)
3. Fraud and theft
One of the common denominators for these arrangements is that some part of the scam operation is based overseas in a low regulatory environment. Although there often needs to be some UK involvement to be able to give the regulated advice if, for example, a transfer from defined benefit is required. It is in this space that millions of pounds are leaving good quality pension schemes and being put at dreadful risk.
To put scams into perspective, a current pensions scam was recently found to have links to the biggest promoter/introducer of the Ark pensions scam from around 2010.
What are the factors driving the issues, after all, bad old-fashioned “trust-busting” is nothing new:
1. Pension Freedoms – the Government’s announcement to remove some of the rules around how defined contribution benefits could be taken has been deeply controversial. I hoped what it would achieve would be a closer relationship between people and their pension savings and that there would be some greater ownership of what their savings were doing and what they would provide during their retirement years. However, the complication around the way ‘Freedom and Choice’ is communicated and the inherent complexities of pensions and the low levels of understanding amongst people means that scammers can feed into this confusion and the story of accessibility to encourage them to make poor decisions.
2. Defined Benefit depicted as inferior and at risk - The narrative story that defined benefit is bad is one that is growing. Defined benefit pension schemes fail (BHS), the PPF is inadequate, you can’t retire early, deferred benefits are ‘frozen’, the benefits are inflexible and only linked to inflation. If you link this with the story that transfer values from defined benefit schemes are at an all-time high there is a fire-sale feeling out there.
3. Death Benefits – the offer of tax free benefits to your loved ones (if you die before age 75) is also a major draw in the flight from defined benefits.
4. Too easy - The ease that scammers can contact people for free pension reviews and the ease at which schemes have been established and thus providing the fuel for the fire is the major issue. For many years HMRC has allowed new schemes to be registered without high-level due diligence checks to ensure that they are genuine.
5. Lack of co-ordination – who is responsible for policing the scammers? TPR? Action Fraud? HMRC? The police? FCA? No one in government or related bodies appears to be taking the bull by the horn and addressing some of these concerns in a co-ordinated way.
The Government is consulting on regulations designed to address three prongs of the problem.
1. A cold calling ban in relation to pensions – this is in response to a wide-ranging campaign in the industry to make the default position that a cold-call from someone looking to give some free advice on your pension or similar is a bad idea. We know that the vast majority of scams start like this.
2. Limiting statutory right to transfers – this may be a double-edged sword but it gives some power back to the Trustees (after the Hughes v Royal London case) that where the receiving schemes waddles and quacks, it’s a duck and so the Trustees can decide that the statutory right does not exist. However, this will create an increase in contentious situations and Pension Ombudsman court cases determine whether the right exists or not.
3. Make it harder to set up dodgy schemes – this has been a problem since A-Day when setting up a scheme, and getting tacit “approval” from the authorities gives a badge of approval to the scheme. This will help but the elephant in the room remains, the risks posed by the use of SSAS schemes and the investment options offered to them and SIPPS.
The cold-calling ban will not cover investments, the fastest growing scam issue where legitimate pension arrangements are investing in unregulated funds and then worrying where the money went. The cold-calling ban won’t stop overseas arrangements.
The Government needs to act quickly to get this opening gambit done by:
1. Establishing scams as a remit of a body to address pension scams
2. A white list of good schemes – where there is no employer link currently
3. A name and shame culture for bad schemes and the people behind them
4. Create space for transferring schemes to check whether the scheme they are transferring to is under suspicion.
5. Mandate that Mall Alright does more rogue traders on financial products.
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